The subprime crisis has hit our economy hard. While some sectors of the economy have improved, things do not look so sunny for the subprime industry thus far.
For those with bad credit, it is much harder to obtain mortgages today than it was in the past. Even if individuals with bad credit are able to beat the odds and get a mortgage, it may come with a very high rate, and that is also something tough to deal with.
It is important for homeowners and home buyers to compare the short term and long term effects of a bad credit mortgage before getting locked into something that they may or may not be able to afford.
Predatory lending techniques have sent many homes into foreclosure. Foreclosure will then lower credit scores even further. It truly is a vicious cycle and for many people this forces them into a bad credit mortgage with a high interest rate they cannot afford.
Next, they are unable to keep up with the exorbitant payments, and default on their loan. Finally, their credit rating worsens, and they are deeper into financial ruin than they were before.
Why Do Lenders Shy Away From Borrowers From this Type of Credit?
Many lenders would rather not deal with borrowers who have low credit scores. These borrowers are commonly referred to as ‘high risk. Other lenders who do choose to do business with borrowers who have bad credit will many times offer mortgages with extremely high interest rates.
The theory is that should the borrower default on the loan, the lender would already have recouped a larger percentage of the principal. A good rule of thumb to remember is that the higher a borrower’s FIC score is, the higher they can expect their interest rate to be.
These rates can be higher than some credit cards, so many borrowers may want to shop around before locking themselves into a legal and binding contract.
Are These Mortgages a Good Idea?
Whether bad credit mortgages are a good idea depends on which side of the fence you are on. For example, lenders can expect to earn very steep profits from bad credit mortgages if they do not go into default.
In addition, mortgage brokers that negotiate with banks for the borrowers will generally earn an overhead fee. Combine that with the stiff fines that may be levied against borrowers who fall behind in their payments, and it is easy to see that mortgage companies and loan brokers may have tremendous gains from their investment in offering bad credit mortgages, and have many various safeguards in place to protect their investment.
On the other hand, bad credit mortgages can be really costly for borrowers. Interest rates may be higher than 20%, and late payments will likely be extremely costly.
Considering that many individuals who have bad credit got into that situation by making unwise financial decisions, it is unfortunate that many lenders take advantage of financial naivety by setting these borrowers up to fail.
Credit counseling can help many people who have bad credit to repair their credit rating and regain control over their finances. Credit counselors will look at each of their client’s three credit scores, and will then offer advice of how to deal with the outstanding bills, and how to build good credit.
The best way to get out of this type of mortgage is to refinance and find a better deal. However, if the credit score has not been improved, a homeowner likely will not be able to find a much better rate than they already have.
Taking steps to fix or repair a bad credit rating before refinancing will greatly improve your odds of obtaining a new mortgage with a more reasonable and affordable interest rate.